SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-14854
Salisbury Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5 Bissell Street Lakeville Connecticut 06039
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (860) 435-9801
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer.
Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 20, 2003
1,423,238
1
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Condensed Financial Statements:
Condensed Consolidated Balance Sheets -March 31, 2003 (unaudited)
and December 31, 2002 4
Condensed Consolidated Statements of Income
-three months ended March 31, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
-three months ended March 31, 2003 and 2002 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 22
Exhibits
Computation of per share earnings - Exhibit 11
Certifications of Chief Executive Officer and Chief Financial Officer -
Exhibit 99.1 and Exhibit 99.2
2
Part I--FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
3
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(unaudited)
ASSETS
Cash & due from banks $ 6,312 $ 7,885
Interest bearing demand deposits with other banks 808 448
Money market mutual funds 504 537
Federal funds sold 0 1,750
------------ ------------
Cash and cash equivalents 7,624 10,620
Investment in available-for-sale securities (at fair value) 150,738 135,169
Investments in held to maturity securities (fair values of $329,000 as
of March 31, 2003 and $332,000 as of December 31, 2002 319 321
Federal Home Loan Bank stock, at cost 3,753 2,945
Loans, less allowance for loan losses of $1,480,000 and $1,458,000
as of March 31, 2003 and December 31, 2002, respectively 139,980 135,632
Investment in real estate 75 75
Premises and equipment 2,842 2,805
Other real estate owned 75 75
Goodwill 2,358 2,358
Core deposit intangible 783 800
Accrued interest receivable 2,022 1,934
Other assets 474 373
------------ ------------
Total Assets $ 311,043 $ 293,107
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 37,098 $ 38,930
Interest-bearing 171,634 172,107
------------ ------------
Total Deposits 208,732 211,037
Federal Home Loan Bank advances 71,631 51,891
Other liabilities 2,731 2,834
------------ ------------
Total Liabilities 283,094 265,762
------------ ------------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding shares, 1,423,238 at March 31, 2003 142 142
and 1,423,238 at December 31, 2002
Paid-in capital 2,304 2,304
Retained earnings 23,866 23,165
Accumulated other comprehensive income 1,637 1,734
------------ ------------
Total Shareholders' Equity 27,949 27,345
------------ ------------
Total Liabilities and Shareholders' Equity $ 311,043 $ 293,107
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
March 31, 2003 and 2002
(unaudited)
Three Months Ended
March 31
--------
2003 2002
---------- ----------
Interest and dividend income:
Interest and fees on loans $ 2,287 $ 2,569
Interest and dividends on securities:
Taxable 1,224 981
Tax-exempt 506 434
Dividends on equity securities 26 35
Other interest 7 42
---------- ----------
Total interest and dividend income 4,050 4,061
---------- ----------
Interest expense:
Interest on deposits 787 1,088
Interest on Federal Home Loan Bank advances 739 710
---------- ----------
Total interest expense 1,526 1,798
---------- ----------
Net interest and dividend income 2,524 2,263
Provision for loan losses 37 37
---------- ----------
Net interest and dividend income after provision
for loan losses 2,487 2,226
---------- ----------
Other income:
Trust department income 290 253
Service charges on deposit accounts 133 114
Gains on sales of available-for-sale securities, net 337 15
Gain on sale of loans held-for-sale 22 56
Other income 200 126
---------- ----------
Total other income 982 564
---------- ----------
Other expense:
Salaries and employee benefits 1,173 1,052
Occupancy expense 95 73
Equipment expense 116 123
Data processing 153 134
Insurance 27 25
Printing and stationery 34 41
Legal expense 37 8
Amortization of core deposit intangible 18 42
Other expense 389 317
---------- ----------
Total other expense 2,042 1,815
---------- ----------
Income before income taxes 1,427 975
Income taxes 398 253
---------- ----------
Net income $ 1,029 $ 722
========== ==========
Earnings per common share $ .72 $ .51
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Three months ended March 31, 2003 and 2002
(unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 1,029 $ 722
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net 78 121
Gain on sales of available-for-sale securities, net (337) (14)
Provision for loan losses 37 37
Depreciation and amortization 81 80
Amortization of core deposit intangible 18 42
Accretion of fair value adjustment on deposits (10) (43)
Increase in interest receivable (89) (220)
Deferred tax benefit 13 170
(Increase) in prepaid expenses (91) (18)
Increase in other assets (71) (134)
Increase in taxes payable 276 34
Decrease in accrued expenses (310) (164)
Decrease in interest payable (2) (1)
Increase in other liabilities 27 100
---------- ----------
Net cash provided by operating activities 649 712
---------- ----------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (808) 0
Purchases of available-for-sale securities (29,171) (29,760)
Proceeds from sales of available-for-sale securities 9,386 8,634
Proceeds from maturities of available-for-sale securities 4,316 5,076
Proceeds from maturities of held-to-maturity securities 3 71
Net (increase) decrease in loans (4,389) 3,253
Recoveries of loans previously charged-off 3 4
Capital expenditures (118) (62)
---------- ----------
Net cash used in investing activities (20,778) (12,784)
---------- ----------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Three months ended March 31, 2003 and 2002
(unaudited)
(continued)
2003 2002
---------- ----------
Cash flows from financing activities:
Net decrease in demand deposits, NOW and
savings accounts (3,078) (4,203)
Net increase in time deposits 783 1,484
Advances from Federal Home Loan Bank 20,000 0
Principal payments on advances from Federal Home Loan Bank (259) (332)
Dividends paid (313) (299)
---------- ----------
Net cash provided by(used in)financing activities 17,133 (3,350)
---------- ----------
Net decrease in cash and cash equivalents (2,996) (15,422)
Cash and cash equivalents at beginning of year 10,620 26,210
---------- ----------
Cash and cash equivalents at end of period $ 7,624 $ 10,788
========== ==========
Supplemental disclosures:
Interest paid $ 1,528 $ 1,799
Income taxes paid 109 49
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
SALISBURY BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed interim financial statements are unaudited and
include the accounts of Salisbury Bancorp, Inc. (the "Company"), those of
Salisbury Bank and Trust Company (the "Bank"), its wholly-owned subsidiary and
the Bank's subsidiary, S.B.T. Realty, Inc. The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America (GAAP) for interim financial information and
with the instructions to SEC Form 10-Q. Accordingly, they do not include all the
information and footnotes required by GAAP for complete financial statements.
All significant intercompany accounts and transactions have been eliminated in
the consolidation. These financial statements reflect, in the opinion of
Management, all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Company's financial position and the
results of its operations and its cash flows for the periods presented.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 2002 Annual
Report on Form 10-K.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" establishes standards for disclosure of comprehensive income, which
includes net income and any changes in equity from non-owner sources that are
not recorded in the income statement (such as changes in the net unrealized
gains (losses) on securities). The purpose of reporting comprehensive income is
to report a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. The Company's one source of other
comprehensive income is the net unrealized gain (loss) on securities.
Comprehensive Income
Three months ended March 31,
2003 2002
---------- ----------
Net income $ 1,029 $ 722
Net unrealized losses
on securities during period (97) (136)
---------- ----------
Comprehensive income $ 932 $ 586
========== ==========
8
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 141 improves the consistency of
the accounting and reporting for business combinations by requiring that all
business combinations be accounted for under a single method - the purchase
method. Use of the pooling-of-interests method is no longer permitted. Statement
No. 141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. The impact of adopting this Statement on the
consolidated financial statements was not material.
Statement of Financial Accounting Standards No. 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment. The
amortization of goodwill ceases upon adoption of the Statement, which for most
companies, was January 1, 2002. The impact of adopting this Statement on the
consolidated financial statements was not material.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions", an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No.
9. SFAS No. 72 "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" and FASB Interpretation No. 9 "Applying APB Opinions No. 16 and 17
When a Savings and Loan Association or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method" provided interpretive
guidance on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
FASB Statement No. 147 removes acquisitions of financial institutions from the
scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with FASB Statements No. 141
"Business Combinations" and No. 142 "Goodwill and Other Intangible Assets".
Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of FASB Statement No. 147. In addition, FASB Statement No. 147 amends FASB
Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that FASB
Statement No. 144 requires for other long-lived assets that are held and used.
Paragraph 5 of FASB Statement No. 147, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer -relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of FASB Statement No. 147, the Company, has
reclassified, as of September 30, 2002 its recognized unidentifiable intangible
asset related to branch acquisition(s). This asset was reclassified as goodwill
(reclassified goodwill). The amount reclassified was $2,357,884, the carrying
amount as of June 30, 2002. The reclassified goodwill is being accounted for and
reported prospectively as goodwill under FASB Statement No. 142, with no
amortization expense. Accordingly, the consolidated financial statements for the
nine-months ended September 30, 2002 do not reflect amortization in the amount
of $71,572 that would have been recorded if FASB Statement No. 147 had not been
issued.
Also in accordance with paragraph 9 of FASB Statement No. 147, as of September
30, 2002, the Company reclassified its core deposit intangible asset and
accounted for it as an asset apart from the unidentifiable intangible asset and
not as goodwill.
The effect of the Company's adoption of SFAS No. 147 was reflected in the
financial statements beginning June 30, 2002.
9
Item 2. Management's Discussion and Analysis
Business
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole subsidiary is the Bank, which has four (4) full
service offices including a Trust Department located in the towns of North
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Company and the Bank
were formed in 1998 and 1848, respectively. In order to provide a strong
foundation for building shareholder value and serving customers, the Company
remains committed to investing in the technological and human resources
necessary to developing new personalized financial products and services to meet
the needs of customers. This discussion should be read in conjunction with
Salisbury Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December
31, 2002.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 2003 and 2002
Overview
During the first quarter of 2003, the Company's net income increased $307,000 or
42.5% to $1,029,000 or $.72 per common as compared to net income of $722,000 or
$.51 per common for the three months ended March 31, 2002. The improvement in
net income is the result of a combination of growth in earning assets primarily
involving available-for-sale securities funded by the Federal Home Loan Bank of
Boston, that has produced an increase in total net interest and dividend income.
The improvement in earnings was the result of reductions in interest expense, as
well as an increase in other noninterest income.
Total assets at March 31, 2003 were $311,043,000 compared to $293,107,000 at
December 31, 2002. This represents an increase of $17,936,000 or 6.1%. This
increase is primarily the result of a strategy to increase interest income. Such
strategy involved funding advances from the Federal Home Loan Bank of Boston.
These funds were invested in securities yielding a rate larger than the
borrowing rate, resulting in an increase in interest income. The securities
portfolio including Federal Home Loan Bank stock totaled $154,810,000 at March
31, 2003 and compares to a total portfolio of $138,435,000 at December 31, 2002
This increase of $16,375,000 or 11.8% is a reflection of the above mentioned
strategy to increase interest income. Loan demand increased slightly during the
first quarter of 2003 and as a result, total loans increased to $139,980,000.
This is an increase of $4,348,000 or 3.2% when comparing total loans of
$135,632,000 at December 31, 2002. The Bank constantly monitors the quality of
the loan portfolio to ensure that loan quality will not be sacrificed for growth
or otherwise compromise the Company's objectives. Nonperforming loans totaled
$1,112,000 at March 31, 2003. This compares to total nonperforming loans of
$1,400,000 at December 31, 2002 and represents a decrease of $288,000 or 20.6%.
The Company has one asset classified as Other Real Estate Owned. The carrying
value of that asset is $75,000. Deposits at March 31, 2003 totaled $208,732,000
and represents a slight decrease when comparing total deposits of $ 211,037,000
at December 31, 2002. This decrease of 2,305,000 or 1.1% represents the
traditional seasonal cash flows of the Company's deposit customers. Federal Home
Loan Bank advances increased during the first quarter of 2003 and totaled
$71,631,000. This compares to total advances of $51,891,000 at December 31,
2002. This increase of 38% is attributed to the strategy mentioned previously
that was implemented to increase interest income.
As a result of the Company's financial performance, the Board of Directors
declared a first quarter cash dividend of $.23 per common share. This compares
to a cash dividend of $.22 per common share that was that was paid for the first
quarter of 2002. The dividend was paid on April 25, 2003 to shareholders of
record as of March 31, 2003. This represents a dividend payout ratio of
approximately 32%. The Company's risk based capital ratios at March 31, 2003,
which include the risk weighted assets and capital of the Salisbury Bank and
Trust Company, were 15.24% for tier 1 capital and 16.33% for total risk based
capital. The Company's leverage ratio was 7.64% at March 31, 2003.
10
THREE MONTHS ENDED MARCH 31, 2003
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net Interest Income
The Company's earnings are primarily dependent upon net interest income and
noninterest income from its community banking operations with net interest
income being the largest component of the Company's revenue. Net interest and
dividend income is the difference between interest and dividends earned on the
loan and securities portfolio and interest paid on deposits and advances from
the Federal Home Loan Bank. Non interest income is primarily derived from the
Trust Department, service charges and other fees related to deposit and loan
accounts and from gains taken on the sale of available-for-sale securities. For
the following discussion, net interest income is presented on a fully
taxable-equivalent ("FTE") basis. FTE interest income restates reported interest
income on tax exempt loans and securities as if such interest were taxed at the
Company's federal tax rate of 34% for all periods presented.
(amounts in thousands)
Three months ended March 31 2003 2002 2001
---- ---- ----
Interest and Dividend Income $4,050 $4,061 $4,299
(financial statements)
Tax Equivalent Adjustment 261 224 93
------ ------ ------
Total interest income (on an FTE basis) 4,311 4,285 4,392
Interest Expense 1,526 1,798 2,204
------ ------ ------
Net Interest and Dividend Income-FTE $2,785 $2,487 $2,188
====== ====== ======
Competition and an economic environment of generally lower interest rates
continue to pressure interest margins. Interest and dividend income on an FTE
basis for the three months ended March 31, 2003, totaled $4,311,000 as compared
to $4,285,000 for the same time period in 2002. A continuing change in the mix
of earning assets which reflects an increase in tax exempt securities has
resulted in a significant increase in the tax equivalent adjustment to $261,000
for the three months ended March 31, 2003 as compared to $224,000 for the
corresponding period in 2002. This represents an increase of $37,000 or 16.5%
when comparing the first quarter of 2003 to the same quarter in 2002.
Interest expense on deposits for the first three months of 2003 decreased
$301,000 or 27.7% and totaled $787,000. This compares to $1,088,000 for the
corresponding period in 2002. Although deposits decreased, generally lower
interest rates resulted in the decrease in interest expense. Federal Home Loan
Bank advances have increased resulting in an increase in interest expense of
$29,000 or 4.1% to $739,000 for the first quarter of 2003. Interest expense for
the corresponding period in 2002 totaled $710,000. Total interest expense for
the three month period ended March 31, 2003 was $1,526,000. This compares to
total interest for the same period in 2002 of $1,798,000. The decrease is
$272,000 or 15.1%.
Overall, net interest and dividend income (on an FTE basis) increased $298,000
or 12.0% and totaled $2,785,000 at March 31, 2003.This compared to net interest
and dividend income on an FTE basis of $2,487,000 for the same period in 2002.
11
Noninterest Income
Noninterest income totaled $982,000 for the quarter ended March 31, 2003. This
compares to $564,000 for the corresponding period in 2002. The increase of
$418,000 or 74.1% is primarily attributable to an increase in gains on sales of
available-for-sale securities that totaled $337,000 for the first quarter of
2003 as compared to $15,000 for the same period in 2002. As mentioned
previously, loan demand increased during the first quarter and movements in the
markets presented opportunities to realize gains on sales of securities in order
to fund the increase in loan demand. Trust Department income increased $37,000
or 14.6% to $290,000. This compares to income totaling $253,000 for the first
quarter of 2002. This increase is primarily the result of increased business
resulting from new business development. Service charges on deposit accounts
have increased to $133,000 from $114,000 respectively from last year. This is
primarily the result of an increase in deposit account transactions. Other
income increased $74,000 or 58.7% and totaled $200,000 at March 31, 2003. This
compares to other income totaling $126,000 at March 31, 2002. This increase is
primarily attributable to an increase in fees resulting from mortgage
refinancing activity.
Noninterest Expense
Noninterest expenses increased $227,000 or 12.5% to $2,042,000 for the quarter
ended March 31, 2003 as compared to $1,815,000 for the corresponding period in
2002. Salaries and employee benefits totaled $1,173,000 for the quarter ended
March 31, 2003 compared to $1,052,000 for the same period in 2002. This is an
increase of $121,000 or 11.5% and is primarily due to an increase in staff along
with annual salary increases and the increase in the cost of employee benefits.
Occupancy and equipment expenses totaled $211,000 for the first quarter of 2003
and compares to total occupancy and equipment expenses of $196,000 for the same
period in 2002. The increase of $15,000 or 7.7% is primarily the result of
expenses related to additional costs of winter maintenance. Data processing
expense increased to $153,000 for the quarter ended March 31, 2003. This is an
increase of $19,000 or 14.2% when comparing the first quarter expense of
$134,000 in 2002. This is primarily the result of enhancements to our delivery
channels to our customers. Other operating expenses totaled $505,000 for the
first quarter of 2003. This compares to expenses of $433,000 for the same period
in 2002. This increase of 16.6% or $72,000 reflects the effects that business
growth is having on normal operating expenses and increased professional
expenses in responding to the requirements of the Sarbanes-Oxley Act of 2002 and
other requirements to which the Company is now subject.
Income Taxes
The income tax provision for the first three months of 2003 totaled $398,000 in
comparison to $253,000 for the same period in 2002. The increase reflects an
increase in taxable income.
Net Income
Overall, net income totaled $1,029,000 for the three months ended March 31,
2003. This compares to net income of $722,000 for the same period in 2002. This
is an increase of $307,000 or 42.5% and represents earnings of $.72 per share.
This compares to earnings per share of $.51 for the same period in 2002. The
improvement in net income is primarily a reflection of an increase in interest
earning assets, a reduction in interest expense and an increase in noninterest
income.
FINANCIAL CONDITION
Total assets at March 31, 2003 were $311,043,000, compared to $293,107,000 at
December 31, 2002, an increase of $17,936,000 or 6.1%. This increase was
primarily due to additional advances taken from the Federal Home Loan Bank as
part of a strategy to increase interest income.
12
Securities
During the period ended March 31, 2003, the securities portfolio, including
Federal Home Loan Bank stock increased $16,375,000 or 11.8% to $154,810,000 from
$138,435,000 at December 31, 2002. The increase is a reflection of the strategy
to increase interest income as the advances from the Federal Home Loan Bank were
used to purchase securities.
The composition of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage backed securities and securities issued by states
of the United States and political subdivisions of the states. At March 31,
2003, securities totaling $154,491,000 were classified as available-for-sale and
securities totaling $319,000 were classified as held-to-maturity.
Securities are classified in the portfolio as either Securities-Available-for
Sale or Securities-Held-to-Maturity. The securities reported as
available-for-sale are stated at fair value in the financial statements of the
Company. Unrealized holding gains and losses (accumulated other comprehensive
income/loss) are not included in earnings, but are reported as a net amount
(less expected tax) in a separate component of capital until realized. At March
31, 2003, the unrealized gain net of tax was $1,637,000. This compares to an
unrealized gain net of tax of $1,734,000 at December 31, 2002. The securities
reported as securities-held-to-maturity are stated at amortized cost.
Lending
New business development during the first quarter of 2003 coupled with a small
increase in loan demand resulted in an increase in loans receivable, net of
allowance for loan losses of $4,348,000 or 3.2% to $139,980,000. Competition for
loans, including residential mortgage loans, remains very aggressive in the
market area of the Company. The following table represents the composition of
the loan portfolio comparing March 31, 2003 to December 31, 2002:
March 31, 2003 December 31, 2002
-------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 10,642 $ 10,127
Real Estate-construction and land development 6,508 6,027
Real Estate-residential 98,101 93,636
Real Estate-commercial 18,459 18,002
Consumer 7,624 9,002
Other 126 291
--------- ---------
141,460 137,090
Allowance for loan losses (1,480) (1,458)
--------- ---------
Loans Outstanding $ 139,980 $ 135,632
========= =========
Provisions and Allowance for Loan Losses
Total loans at March 31, 2003 were $139,980,000, which compares to total loans
of $135,632,000 at December 31, 2002. This is an increase of $4,348,000 or 3.2%.
At March 31, 2003 approximately 87% of the Bank's loan portfolio was related to
real estate products and although the portfolio increased during the first
quarter of 2003, the concentration remained consistent as approximately 86% of
the portfolio was related to real estate at December 31, 2002. There were no
material changes in the composition of the loan portfolio during this period.
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Company's objectives. Because of this
risk associated with extending loans, the Bank maintains an allowance or reserve
for credit losses through charges to earnings. The loan loss provision for the
three month period ended March 31, 2003 was $37,000, the same as the
corresponding period in 2002.
13
The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation methods or assumptions that the Bank
uses in making this determination during the period ended March 31, 2003. Such
evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which is submitted to the Board of Directors for
approval. Loans are initially risk rated when originated. If there is
deterioration in the credit, the risk rating is adjusted accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS 114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Impaired loans are defined in the Bank's Loan Policy as residential real estate
mortgages with balances of $300,000 or more and commercial loans of $100,000 or
more when it is probable that the Bank will not be able to collect all principal
and interest due according to the terms of the note. Any such commercial loans
and residential mortgages will be considered impaired under any of the following
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
three month period ended March 31, 2003.
At March 31, 2003 the allowance for loan losses totaled $1,480,000, representing
133.09% of nonperforming loans, which totaled $1,112,000, and 1.05% of total
loans of $141,460,000. This compares to $1,458,000 representing 104.14% of
nonperforming loans, which totaled $1,400,000 and 1.06% of total loans of
$137,090,000 at December 31, 2002. No loans were charged off during the three
month period ended March 31, 2003 as compared to $32,000 during the same period
in 2002. A total of $3,000 of previously charged off loans was recovered during
the three month period ended March 31, 2003. Recoveries for the same period in
2002 totaled $4,000. When comparing the two years, recoveries exceeded charged
off loans for the first quarter of 2003 by $3,000 and during the year 2002 net
charge-offs exceeded recoveries by $28,000. Management believes that the
allowance for loan losses is adequate. While management estimates loan losses
using the best available information, no assurances can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
problem loans, identification of additional problem loans or other factors.
Additionally, with expectations of the Company to grow its existing portfolio,
future additions to the allowance may be necessary to maintain adequate coverage
ratios.
14
Deposits
The Company offers a variety of deposit accounts with a range of interest rates
and terms. The following table illustrates the composition of the Company's
deposits at March 31, 2003 and December 31, 2002
March 31, 2003 December 31, 2002
-------------- -----------------
(amounts in thousands)
Demand $ 37,098 $ 38,930
NOW 17,006 18,274
Money Market 39,099 42,148
Savings 45,222 42,161
Time 70,307 69,524
-------- --------
Total Deposits $208,732 $211,037
======== ========
Total deposits, which constitute the principal funding source of the Company's
assets, have remained consistent during the first quarter of 2003 when compared
to year end 2002. The slight decrease represents the traditional seasonal cash
flows of the Company's deposit customers.
Borrowings
The Company utilizes advances from the Federal Home Loan Bank as part of its
operating strategy to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At March 31, 2003, the Company had $71,631,000 in
outstanding advances from the Federal Home Loan Bank compared to $51,891,000 at
December 31, 2002. Management expects that in the current interest rate
environment and absent a dramatic increase in loan demand, it will continue this
strategy of supplementing deposit growth with advances from the Federal Home
Loan Bank.
Interest Rate Risk
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
In an attempt to manage its exposure to changes in interest rates, the Bank's
assets and liabilities are managed in accordance with policies established and
reviewed by the Bank's Board of Directors. The Bank's Asset/Liability Management
Committee monitors asset and deposit levels, developments and trends in interest
rates, liquidity and capital. One of the primary financial objectives is to
manage interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At March 31,
2003, the Company was slightly asset sensitive (positive gap). This
15
would suggest, that during a period of rising interest rates, the Company would
be in a better position to invest in higher yielding assets resulting in growth
in interest income. To the contrary, during a period of falling interest rates,
a positive gap would result in a decrease in interest income. The level of
interest rate risk at March 31, 2003 is within the limits approved by the Board
of Directors.
Liquidity
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust
Company is a member of the Federal Home Loan Bank of Boston. This enhances the
liquidity position by providing a source of available borrowings.
At March 31, 2003 the Company had approximately $32,848,000 in loan commitments
outstanding. Management believes that the current level of liquidity is ample to
meet the Company's needs for both the present and foreseeable future.
Capital
At March 31, 2003, the Company had $27,949,000 in shareholder equity compared to
$27,345,000 at December 31, 2002. This represents an increase of $604,000 or
2.2%. Several components contributed to the change since December 2002. Earnings
for the three month period ended March 31, 2003 totaled $1,029,000. Market
conditions have resulted in a reduced value to unrealized comprehensive income
of $97,000. The Company also declared a first quarter dividend resulting in a
decrease in capital of $327,000. Under current regulatory definitions the
Company and the Bank are considered to be "well capitalized" for capital
adequacy purposes. As a result, the Bank pays the lowest federal deposit
insurance deposit premiums possible. One primary measure of capital adequacy for
regulatory purposes is based on the ratio of risk-based capital to risk weighted
assets. This method of measuring capital adequacy helps to establish capital
requirements that are more sensitive to the differences in risk associated with
various assets. It takes into account off-balance sheet exposure in assessing
capital adequacy and it minimizes disincentives to holding liquid, low risk
assets. At March 31, 2003, the Company had a risk-based capital ratio of 16.33%
compared to 17.21% at December 31, 2002. Maintaining strong capital is essential
to bank safety and soundness. However, the effective management of capital
resources requires generating attractive returns on equity to build value for
shareholders while maintaining appropriate levels of capital to fund growth,
meet regulatory requirements and be consistent with prudent industry practices.
Management believes that the capital ratios of the Company and Bank are adequate
to continue to meet the foreseeable capital needs of the institution.
Impact of Inflation and Changing Prices
The Company's consolidated financial statements are prepared in conformity with
GAAP which require the measurement of financial condition and operating results
in terms of historical dollars without considering changes in the relative
purchasing power of money, over time, due to inflation. Unlike most industrial
companies, virtually all of the assets and liabilities of the Company are
monetary and as a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation; although they do
not necessarily move in the same direction or with the same magnitude as the
prices of goods and services. Although not an influence in recent years,
inflation could impact earnings in future periods.
16
Forward Looking Statements
This Form 10-Q and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and the Bank, may include forward-looking statements
relating to such matters as:
(a) assumptions concerning future economic and business conditions and there
effect on the economy in general and on the markets in which the Company
and the Bank do business, and
(b) expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attraction of new deposit and
loan customers and the introduction of new products and services.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative an regulatory environment that negatively
impact the Company and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial institutions;
(d) the impact of technological advances; and
(e) other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The main components of market risk for the Company are equity price risk,
interest rate risk and liquidity risk. The Company's stock is traded on the
American Stock Exchange and as a result, the value of its common stock may
change with market movements. The Company manages interest rate risk and
liquidity risk through an ALCO Committee comprised of outside Directors and
senior management. The committee monitors compliance with the Bank's
Asset/Liability Policy which provides guidelines to analyze and manage gap,
which is the difference between the amount of assets and the amounts of
liabilities which mature or reprice during specific time frames. Model
simulation is used to measure earnings volatility under both rising and falling
rate scenarios. The Company's interest rate risk and liquidity position has not
significantly changed from year end 2002.
Item 4. Controls and Procedures
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
17
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings-Not applicable
Item 2. - Changes in Securities and Use of Proceeds-Not applicable
Item 3. - Defaults Upon Senior Securities-Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders-Not applicable
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
a. Exhibits -
11. Computation of Earnings per Share
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K:
The Company filed a Form 8-K on March 4, 2003 to report that the Company's
Board of Directors declared a quarterly cash dividend of $.23 per share to
be paid on April 25, 2003 to shareholders of record as of March 31, 2003.
18
SALISBURY BANCORP, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Salisbury Bancorp, Inc.
Date: May 12, 2003 by: /s/ John F. Perotti
----------------------------------
John F. Perotti
President/Chief Executive Officer
Date: May 12, 2003 by: /s/ John F. Foley
----------------------------------
John F. Foley
Chief Financial Officer
19
CERTIFICATIONS
I, John F. Perotti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salisbury Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
By: /s/ John F. Perotti
-------------------
President and CEO
20
CERTIFICATIONS
I, John F. Foley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salisbury Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
By: /s/ John F. Foley
-----------------------
Chief Financial Officer
21